We need more large multinationals

Allister Heath was Editor of City A.M. for six years up until June 2014.

Allister Heath

POLITICIANS often try and drive a wedge between small and large businesses. The former are portrayed as the real heroes, to be helped whenever possible (albeit only rhetorically, of course); the latter are treated with suspicion. Like much of what passes for informed debate these days, however, this distinction is bogus. Small and large firms are both equally vital to the economy; their relationship is quietly symbiotic.

Small firms create a large chunk of new jobs; they are a central driver of entrepreneurial innovation and risk taking. They create the new large businesses of tomorrow. We need more entrepreneurs. But large multinationals are just as essential to economic performance: they are responsible for promoting best practices, importing knowledge and know-how from all over the world and are the key drivers of productivity growth.

Governments should aim to create a level playing field, maximise competition and dismantle subsidies and artificial barriers. That means ensuring that the new resolution procedures and all the other reforms to the banking sector remove any artificial, state-created advantage to big firms. It also means ceasing to heap ever more labour market regulations onto business – the extension of paternity leave will, like all similar measures, hit smallest firms hardest as they don’t have vast resources or infrastructure in place to deal with constant staff upheavals.

The best research on how multinational are essential to economic growth can be found in a recent report from McKinsey, the management consultants. The analysis focuses on the US but all the conclusions are identical for the UK – if anything, they are even more likely to hold here in our ultra-international economy. At last count, US multinationals directly accounted for 23 per cent of US private-sector value added (indirectly, if all contractors were included, many of them smaller firms, this would rise to 34 per cent). Since 1990, however, they have been responsible for 31 per cent of the growth in GDP and 41 per cent of gains in US labor productivity, which is hugely disproportionate.

Given that productivity increases account for nearly three-quarters of US economic growth since 2000, with the rest coming from employment gains, multinationals are thus critically important – and will be equally so in all other Western and Asian economies where the labour force is slowing or in decline. Compared with other companies, multinationals are twice as concentrated in globally competitive sectors. They account for three quarters of private R&D spending. They pay higher average wages than other companies. They account for almost half US exports and more than a third of its imports.

This is why we should be deeply worried by two phenomena: there are too few world-beating giant multinationals being created in the UK; and many existing ones are relocating their HQs for tax purposes out of Britain. Both these trends must be reversed. The coalition is right to care about small firms (though, in practice, this is just useless lip-service). But it is wrong to be so relaxed about the exodus of corporate HQs of many of the largest firms, including WPP, Henderson and Shire.

Britain needs once again to set out to attract multinationals, not to repel them. There is not one moment to lose.